3 Top Semiconductor Stocks to Buy in 2017

By Leo Sun Markets Fool.com

Many semiconductor stocks surged in 2016, thanks to rising demand for chips across multiple industries. The Philadelphia Semiconductor Index, which tracks many of the top names in the sector, rallied almost 50% over the past 12 months.

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But despite that robust performance, some semiconductor stocks could rise even further this year. Let's take a look at three chip plays that still have room to run: Xilinx (NASDAQ: XLNX), Micron Technology (NASDAQ: MU), and AMD (NASDAQ: AMD).

Image source: Getty Images.

Xilinx

Xilinx is the largest maker of FPGA (field programmable gate array) chips in the world. These chips can be reprogrammed after being installed, making them well suited for a wide variety of machines -- including servers, connected cars, smart appliances, and airplanes. FPGAs are usually paired with traditional CPUs to handle industry-specific tasks. That's why Intel (NASDAQ: INTC) acquired Xilinx's only meaningful rival, Altera, inlate 2015.

That acquisition made Xilinx -- which launched 16nm chips a year before Intel caught upwith 14nm ones -- a rumored takeover target forlarger chipmakers like Qualcomm. The Altera acquisition also convinced Intel's chipmaking rivals, like Qualcomm and IBM, to pair their CPUs with Xilinx's FPGAs to match Intel's new programmable capabilities.

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Wall Street expects Xilinx's revenue and earnings to respectively grow 6% and 11% this year. It pays a forward dividend yield of 2.3%, and it's raised that payout annually for six straight years. Xilinx's P/E of 25 is a bit higher than its industry average of 22, but its growing network of partnerships and attractiveness as a takeover target shouldn't be ignored.

Micron Technology

Micron is often more volatile than other semiconductor stocks because demand for its DRAM and NAND memory chips is cyclical. Demand for those chips was sluggish throughout most of 2016, due to a slowdown in PC sales, the commoditization of the mobile device market, and a glut of memory chips crushing market prices.

Image source: Micron.

However, those trends reversed in late 2016, asmany device makers reported shortages of memory chips and rising prices. That's why Micron posted double-digit sales growth over the past two quarters, which ended six straight quarters of annual declines. Analysts expect Micron's revenue to rise 57% this year and for its non-GAAP earnings to surge from $0.06 to $2.42.

Micron rallied more than 170% over the past 12 months, but it trades at just six times forward earnings -- indicating that the market remains pretty bearish on its chances (I'd argue that it's overly bearish). However, investors should beware of two major headwinds. First, competition from larger players like Samsung and Western Digital's SanDisk could still put pressure on Micron's margins. Second, Micron warned that Chinese chipmakers could flood the memory market with cheap chips in the near future, which could push Micron intoa downward cycle again.

Advanced Micro Devices

AMD's upside potential might seem limited after rising nearly 400% over the past 12 months. Yet investors shouldn't ignore the chipmaker's compelling comeback story. After years of being squeezed in x86 CPUs by Intel (NASDAQ: INTC) and high-end GPUs by NVIDIA (NASDAQ: NVDA), AMD carved out a growing niche in EESC (Enterprise, Embedded, and Semi-Custom) chipsets for gaming consoles and other devices.

Image source: AMD.

That move enabled AMD to post three straight quarters of positive year-over-year sales growth -- which broke a two-year streak of top-line declines. Analysts expect AMD's revenue to rise 11% this year and for it to achieve non-GAAP profitability again following multiple years of net losses.

As for AMD's valuation, its EV/sales ratio of 3.1 remains comparable to Intel's ratio of three and much lower than NVIDIA's ratio of 8.6.

Besides gaming consoles, AMD plans toturn up the heat on NVIDIA with more low-end VR-ready GPUs and its next-gen Vega GPUs. It also plans to strike back at Intel with its new Ryzen chips, which offer comparable performance as Intel's current-gen Kaby Lake chips at lower price points. Those efforts could lift AMD to new highs, but the stock could also plunge if demand for these chips falls short of expectations.

The key takeaways

Xilinx, Micron, and AMD could all climb higher this year, but each of these companies face clear risks -- Xilinx faces upcoming FPGA battles with Intel, Micron faces challenges from bigger chipmakers, and AMD must land some meaningful blows against Intel and NVIDIA to maintain is momentum. Therefore, investors should carefully weigh these pros and cons before buying any of these semiconductor stocks.

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Leo Sun owns shares of Qualcomm. The Motley Fool owns shares of and recommends Nvidia and Qualcomm. The Motley Fool owns shares of Western Digital. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.